Massachusetts’ new tax on software services is coming under additional attack by the business community, prompting Governor Deval Patrick to acknowledge he is concerned the uproar will damage the state’s reputation in technology circles.
On Wednesday, a Springfield lawyer who represents young technology companies said he will challenge the tax in court, on the grounds that it is so vaguely written it is unconstitutional.
“Right now, we’ve got business owners who don’t know what to collect taxes on,” said Scott Foster, a partner with the law firm Bulkley, Richardson, and Gelinas LLP.
He plans to seek an injunction within two weeks to have the tax suspended while the lawsuit is heard.
Patrick said Wednesday that he is “concerned but not alarmed” about how the tax has been received by the business community, and worried that the commotion is making Massachusetts look bad at a time when it is trying to expand its technology industry.
The governor said he has reached out to leaders in the tech sector to better understand their complaints and plans to meet with legislators and businesses executives next week.
Still, Patrick said, much of the concern appears misplaced. The Department of Revenue has imposed limitations on how and when the tax will be applied, he said, and “when we talk to people in the sector . . . their blood pressure goes down.”
A Springfield lawyer plans a court challenge of the tax, but ‘We think a lot clearer way is for the Legislature to repeal it, or for voters to repeal it,’ says Michael Widmer, head of a taxpayer group.
The law extends the state’s 6.25 percent sales tax to software services that include many common business practices, such as some website design services, modifying off-the-shelf business programs, and enhancing existing applications. It was passed in July as part of larger bill to finance improvements to roads and other parts of the transportation infrastructure.
The Department of Revenue said it has received more than 200 comments about the new tax and has issued more than 50 responses to questions — extraordinarily high numbers for a new law.
Still, business leaders and technology executives continue to push for repeal, saying the tax will cost them far more money than the government estimates and discourage investment and business expansion.
One group has already been formed to organize a ballot initiative to ask voters to repeal the tax during next year’s statewide elections.
Those organizers question whether a court fight will be as effective as taking the issues to voters.
“We think a lot clearer way is for the Legislature to repeal it, or for voters to repeal it,” said Michael Widmer, president of the Massachusetts Taxpayers Foundation, one of the tax’s opponents. Still, he said, “there’s no question that it’s vague, broad, and open-ended.”
It will probably be difficult to convince a judge the tax law is so vague that it’s unconstitutional, said Boston University law professor and tax expert Richard Ainsworth. Sales taxes are notoriously complex, he said, some much more so than those in Massachusetts.
“There’s a lot of fine distinctions in sales taxes,” Ainsworth said. “You’ve got all kinds of crazy rules out there.”
He said the biggest problem with the software services tax isn’t with the way it was written, but how little time legislators gave regulators to put it into effect. Passed in July, the tax went into effect seven days later, but the revenue department isn’t expected to issue final regulations until next month.
“The time frame the Legislature gave was horribly unfair,” Ainsworth said. “They’ve just got indigestion over this thing.”